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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 42 May 2023 F E A T U R E ments to trigger other processes. There are not a lot of processes that are driven by either automation or some objective measure that is 100% accurate all the time. This means requiring a human to play a role where their effectiveness will decline throughout the engagement. This is the heart of the repurchase challenge. Successful repurchase defense requires comprehensive documentation and evidence. The problem is that lenders cannot document their workers' judgments. There are no notes that travel with the file or logic chains that represent the diligence in selecting a method to underwrite income. The lender is resigned to defending a decision without the benefit of the work performed, other than the result. Repurchases are driven by this inability to organize and document judgments system- atically made by humans to rebut a claim of insufficiency or inaccuracy. Many would say loan reviews have subjective elements. Comprehensive capture, organization and presentation of the data, calculations, and judgments leave less room for something other than a preponderance of the evidence to carry the day. If there is documentation or evidence of due diligence supporting the loan, it is very difficult to arrive at a resolution that requires the ultimate response—a repurchase. It is a difficult dynamic when lenders do not feel that they can manage all of those elements at the speed necessary to cover their costs and make a profit in a difficult market. Repurchase risk is not driven by review rates but by an inability to document or pro- vide evidence of the thought life and choices made during the loan-making process on every loan. The Real Challenge of the Mortgage Business: Volatility T he challenge I see over time has been managing volatility. We often do not acknowledge the extent of the influence of market volatility, which cannot be eas- ily quantified. An example would be that everybody knew that a significant interest rate move would affect the market. What is not understood is that the Federal Reserve is also threatening to stop its purchases of mortgage-backed securities, which is having an add-on effect. This creates a tremendous amount of volatility around the 10-year price, which is our pricing benchmark. Volatility is not related to credit in the mortgage assets or to concerns about the housing markets. There may be some con- cern about the economic markets in a macro sense, but the challenge is that volatility is being purely expressed financially around the risk of interest rates going up or falling further and the activity around that. The current expression of volatility is financial. Practices that were profitable in mar- kets with large volumes no longer make sense. Simply reducing headcount to reduce cost is a scalability trap that will not perform when even slightly larger volumes return. Managing operational, financial, and market volatility requires a business strategy and mindset that is designed to virtually eliminate repurchase risk while reducing cost, increasing speed, and delighting the borrowers. Strategists call this a "blue ocean" strategy. A blue ocean strategy is when a company that typically competes on a few attributes like price and service expands the competitive framework to compete on every aspect of the business (cost, speed, risk, product, price, quality, etc.). In doing so, the more robust competitor finds market segments within the narrow definitions of price and ser- vice where the more comprehensive competi- tor can deliver value in more dimensions. The blue ocean competitor who selects a wild goal like zero repurchases or zero defects has, in effect, chosen a strategy that indicates the ability to compete in every dimension of the business model. Let me explain: cur- ing defects will also expose methods to use machines and people more effectively and efficiently in the pursuit of higher quality. Higher quality usually results in reviewing and rectifying old assumptions and practices in favor of evidence-based methods focused on measurable and objective outcomes. The winnowing of the practices that no longer contribute to zero defects, and the promotion of the practices that do, is the lever that will alter the competitive profile of the company in multiple dimensions. This is not creativity but hard work—the hard work of challenging all that you believe in. Why challenge all of the accumulated experience and learning of the entire indus- try? Quite simply because those practices no longer create a profitable outcome. Unprofit- able businesses in low-margin industries that struggle to differentiate themselves are best positioned to think differently—there is little to lose and huge benefits to gain. We often do not acknowledge the extent of the influence of market volatility, which cannot be easily quantified.